Monday, February 22, 2010

Finance and Freedom

The other day I was watching Elizabeth Warren on Real Time with Bill Maher. She made a big deal about how credit cards cost Americans something like $137 billion. (I forget the exact number.) She included everything that gives revenue to credit card companies in that figure: interest, late fees, annual fees, etc. Bill became outraged at the injustice piled onto the American people and Warren nodded approvingly.

What came to my mind was the following: First, $137 billion, while a lot of money, is approximately 1% of our economy. I'm not losing sleep over that amount when credit cards facilitate all types of transactions. Second, I might grant the charge that late fees are a tad high for my tastes. But then again I pay on-time, so maybe that is the right amount. On the other issues, I must object. It's not like credit cards don't tell you the interest they are charging. You know if there is an annual fee when you sign up.

My point here is that the outrage only makes sense if you figure the American people are idiots. These are legal contracts. Not to take this too far, but if American people can't understand their credit card, then is the average American too stupid to enter into any contract?

So, that made me wonder if the American public is too stupid to enter into credit contracts. I couldn't find anything empirical for the United States (although I'm sure it exists because I've seen data before), but I did find this report from the FSA over in the UK that clearly finds that some people really are financially illiterate:
When asked to read the final balance from a bank statement, 91% were able to do so. 7% of those who use a current account got this wrong.

My guess is that the 7% of people with a checking account, but can't read the balance are probably making lots of stupid financial decisions. Therefore, don't we need a Consumer Protection Agency?

Personally, I very much appreciate and enjoy the many and large access to finance that is available to me. It offers me many opportunities. If a consumer agency were to appear I bet my financial life, on balance, would be worse off because of it.

Right now, the credit card companies are largely making money of people who do the wrong things. Keep balances. Pay late. Etc. A consumer protection agency that seeks to change these things will almost inevitably force the companies to shift fees and raise interest on me.

Also, the consumer protection agency will inevitably restrict my freedom. For example, perhaps I need to take a payday loan for some reason. Yet, if they take some hypothetical stance capping interest rates or banning them altogether, then I won't be able to do so. Yes, there are some people who will get into trouble with payday loans or whatever, but freedom also means the freedom to make the wrong decision.

And the freedom to make the wrong decision is gradually being reduced across the country by do-gooders. Banning smoking. Fighting obesity. The simple fact is that in a free society people have the freedom to make decisions others deem poor. Even when faced with calorie counts. It grates me when people who "know better" try to influence people's personal decisions. See also motorcycle helmet and seatbelt laws.

Now, sometimes our decisions have relevant public consequences. Returning to finance, we bailed out banks, private companies, who were doing stupid shit. Failure to save for retirement has public consequences because our society has decided that our elderly deserve some level of dignity and ought not be forced out of want to eat catfood. Likewise, various political decisions have been made regarding health care that make the consequences of obesity or not wearing a seat belt at least partly a public issue.

The basic takeaway from this is that freedom means the freedom to fuck up. Whenever we decide to use the power of government ensure that something won't happen (whether it's banks won't fail, retirees won't be penniless, or banning payday loans) you restrict freedom. Sometimes these have benefits that we as a society are willing to relinquish our freedom for additional security of not starving in old age or a having financial apocalypse, but even nice and cuddly policies that protect people from predatory companies restrict freedom. It's not just intelligence laws or police powers that trade freedom for security. Something to keep in mind.

Well, with that in mind, and getting back to my original point, the financial problems of the last few years have given ammunition to zealots, like Elizabeth Warren, to regulate finance in places that had nothing to do with the problem. For example, credit cards didn't cause the financial crisis. So, saying they are going along after the collapse as if it were business as usual is a ridiculous statement. What upsets me so much about Elizabeth Warren is her self-righteous crusade, supposedly on my behalf, against banks only makes sense if she and I both agree that I'm a fucking moron.

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